Eurozone crisis: Nigerian banks face funding risks

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The non- resolution of the Euro zone debt crises may limit the ability of Nigerian banks to perform certain specialised financial transactions if European banks begin to reduce credit lines on an aggregate basis to their Nigerian counterparties. The IMF Monday said that without action, the debt crisis may force a 4 percent Euro-area contraction this year, while the global economic growth outlook for 2012 was revised lower to 3.3 percent from 4.0 percent. Many Nigerian banks have the majority of their bank lines availed to them by European banks and as such any cut back in credit lines by the banks, due to the European debt crises may affect their ability to create risk assets in the country and improve on lending to the private sector, a key goal of the Central Bank of Nigeria (C.B.N). Muyiwa Oni, Bank Analyst, Stanbic Ibtc in a recent research release suggested that prolonged delay in the resolution of the Euro zone debt crisis and the resultant negative overhang for European banks could limit funding from European banks and financial institutions to Nigerian banks. “This could limit the ability of Nigerian banks to participate in foreign currency transactions of certain kinds, particularly those of longer tenors, as a result of limited funding sources” Some risk averse Nigerian banks have also started cutting back on credit exposure to their European bank counterparties, as the Euro zone debt crises persists, financial risks escalate, and global growth decelerates. Confirming the development, Akin Dawodu, Treasurer at Citibank, in a recent interview said, ‘that makes sense.’ “It’s essentially good risk management, essentially if you see that there is a problem in the region as there is in the Euro zone and the peripheral countries with their sovereign debt difficulties, it makes sense as a bank to draw less from counterparties in that region” The cutting back of Euro zone credit lines by Nigerian banks might also be a case of pre- emptive measures as much as it is one of risk aversion. The Euro zone debt crisis has left a lot of big European banks with difficulties and facing the need to raise more capital under the new Basle III Euro area banking regulations, they therefore may be compelled to cut back credit lines to Nigerian banks to conserve capital, although there is not much evidence of that taking place as yet. Continuing Dawodu says :“Nigerian banks may be cutting back credit lines in the Euro region, to use lines with other banks from other regions so that in the event that there is a cutting of lines from European banks, you are not affected so much. Quite a few Nigerian banks are doing that and are protecting themselves” Nigerian banks are mostly in good financial standing after the CBN injected the equivalent of $4 billion into eight of the country’s 24 banks amid a banking crisis in 2009 and the Asset Management Corporation of Nigeria (AMCON), was set up to buy bad debts from banks. Most bank stocks were however down last year. Stock price performance was weak, declining by 46 percent, even as Nigerian banks ramped up lending and AMCON raised zero coupon bonds to finance the takeover of bad loans off the books of distressed banks. Most analysts are now looking to 2012 for a recovery of the markets in general and bank stocks in particular. The nationalisation of three banks (Bank PHB, Spring Bank and Afribank) in August 2011 triggered a severe lack of confidence in the nation’s capital markets, as blindsided investor’s dumped financial stocks, leading to a persistent downdraft in the Nigerian Stock Exchange (N.S.E) All Share Index, (A.S.I) and the NSE Banking Index. The NSE ASI which opened at 23,829.54 points on August 1st 2011 closed at 20,730.63 on December 30 2011 down some 13 percent in just four months. The Nigerian Banking 10 Index comprised of the top 10 capitalised and most liquid companies in the Nigerian Banking sector was however a worse performer down about 22% in the same period. Nigerian banks have over the years with subtle encouragement from the CBN, established banking relationships with foreign counterparts, with the objective of mutual assistance in the areas of credit lines, technical support, information technology, and trade finance. The credit lines are used by the local banks to settle foreign currency denominated trade transactions with customers. Some of the European banks, with which Nigerian banks have relationships, are HSBC, BNP Paribas, UBS AG, ANZ Commerzbank and ING of Belgium.